Income Taxes

12 Months Ended

Dec. 31, 2019

Note 13 – Income Taxes

The “Income before income tax expense” line item in the consolidated statements of operations consisted of:



(Dollars in thousands)	2019			2018		2017
Domestic	$	(18,711	)	$	14,381	$	39,751
International	73,837			96,208		93,174
Total	$	55,126		$	110,589	$	132,925

The “Income tax expense” line item in the consolidated statements of operations consisted of:



(Dollars in thousands)	Current			Deferred			Total
2019
Domestic	$	3,372		$	(16,827	)	$	(13,455	)
International	21,984			(722		)	21,262
Total	$	25,356		$	(17,549	)	$	7,807

2018
Domestic	$	(341	)	$	(3,007	)	$	(3,348	)
International	26,604			(318		)	26,286
Total	$	26,263		$	(3,325	)	$	22,938

2017
Domestic	$	7,535		$	21,936		$	29,471
International	27,418			(4,423		)	22,995
Total	$	34,953		$	17,513		$	52,466

Deferred tax assets and liabilities as of December 31, 2019 and 2018, were comprised of the following:



(Dollars in thousands)	2019			2018
Deferred tax assets
Accrued employee benefits and compensation	$	5,730		$	4,269
Tax loss and credit carryforwards	17,761			18,604
Reserves and accruals	5,996			4,935
Operating leases	904			—
Other	2,210			1,953
Total deferred tax assets	32,601			29,761
Less deferred tax asset valuation allowance	(14,625		)	(16,889		)
Total deferred tax assets, net of valuation allowance	17,976			12,872
Deferred tax liabilities
Depreciation and amortization	4,025			8,335
Postretirement benefit obligations	1,719			3,234
Unremitted earnings	1,624			1,778
Operating leases	908			—
Other	1,803			2,094
Total deferred tax liabilities	10,079			15,441
Net deferred tax asset (liability)	$	7,897		$	(2,569	)

As of December 31, 2019, we had state net operating loss carryforwards ranging from $0.2 million to $5.0 million in various state taxing jurisdictions, which expire between 2022 and 2039 and approximately $8.7 million of credit carryforwards in Arizona, which will expire between 2020 and 2034. We also had $5.9 million of federal research and development credit carryforwards that begin to expire in 2026. We believe that it is more likely than not that the benefit from certain of the state net operating loss, state credits and federal research and development credits carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of $13.4 million relating to these carryforwards. We currently have approximately $4.6 million of foreign tax credits that begin to expire in 2028.

We had a valuation allowance of $14.6 million as of December 31, 2019 and $16.9 million as of December 31, 2018, against certain of our deferred tax assets, primarily carryforwards expected to expire unused and deferred tax assets that are capital in nature. No valuation allowance has been provided on our other deferred tax assets, as we believe it is more likely than not that all such assets will be realized in the applicable jurisdictions. We reached this conclusion after considering the availability of taxable income in prior carryback years, tax planning strategies, and the likelihood of future taxable income exclusive of reversing temporary differences and carryforwards in the respective jurisdictions or entities. Differences between forecasted and actual future operating results or changes in carryforward periods could adversely impact the amount of deferred tax asset considered realizable.

Income tax expense differs from the amount computed by applying the U.S. federal statutory income tax rate to income before income taxes. The reasons for this difference were as follows:



(Dollars in thousands)	2019			2018			2017
Tax expense at Federal statutory income tax rate	$	11,576		$	23,224		$	46,529
Impact of foreign operations	107			826			(9,603		)
Foreign source income, net of tax credits	(2,248		)	(197		)	1,087
State tax, net of federal	(690		)	121			279
Unrecognized tax benefits	543			(869		)	2,874
U.S. Tax Reform	—			209			13,683
Equity compensation excess tax deductions	(2,902		)	(2,238		)	(3,867		)
General business credits	(656		)	(2,172		)	(1,080		)
Distribution related foreign taxes	1,240			1,916			2,173
Valuation allowance change (excluding U.S. Tax Reform)	(2,527		)	602			1,393
Disproportionate tax effect of pension settlement charges	2,510			—			—
Other	854			1,516			(1,002		)
Income tax expense (benefit)	$	7,807		$	22,938		$	52,466

Our effective income tax rate for 2019 was 14.2% compared to 20.7% for 2018. The 2019 rate decrease was primarily due to the impact of changes in valuation allowance against deferred tax assets associated with carried over research and development credits, excess tax deductions on stock-based compensation, and the international provisions from the U.S. tax reform enacted in 2017. This decrease was partially offset by a disproportionate tax impact from the non-cash settlement charge in connection with the termination of the Merged Plan, increase in taxes associated with the repatriation of foreign earnings, and increase in current accruals of reserves for uncertain tax positions.

We did not make any changes in 2019 to our position on the permanent reinvestment of our historical earnings from foreign operations. With the exception of certain Chinese subsidiaries, we continue to assert that historical foreign earnings are indefinitely reinvested. As of December 31, 2019 and 2018, we had recorded a deferred tax liability of $1.6 million and $1.8 million, respectively, for Chinese withholding tax on undistributed earnings that are not indefinitely reinvested. The other remaining foreign subsidiaries have both the intent and ability to indefinitely reinvest their undistributed earnings and we expect that these undistributed earnings may give rise to an estimated $3.5 million of additional tax liabilities as a result of distribution of such earnings. If circumstances change and it becomes apparent that some, or all of the undistributed earnings as of December 31, 2019 will not be indefinitely reinvested, the provision for the tax consequences, if any, will be recorded in the period when circumstances change. Distributions out of current and future earnings are permissible to fund discretionary activities such as business acquisitions. However, when distributions are made, this could result in a higher effective tax rate.

Unrecognized tax benefits, excluding potential interest and penalties, for the years ended December 31, 2019 and December 31, 2018, were as follows:



(Dollars in thousands)	2019			2018
Beginning balance as of January 1	$	9,801		$	14,565
Gross increases - current period tax positions	3,139			2,583
Gross increases - tax positions in prior periods	—			505
Gross decreases - tax positions in prior periods	—			—
Foreign currency exchange	—			(142		)
Lapse of statute of limitations	(2,723		)	(7,710		)
Ending balance as of December 31	$	10,217		$	9,801

Included in the balance of unrecognized tax benefits as of December 31, 2019 were $9.9 million of tax benefits that, if recognized, would impact the effective tax rate. Also included in the balance of unrecognized tax benefit as of December 31, 2019 were $0.3 million of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes.

We recognize interest accrued related to unrecognized tax benefit as income tax expense. Related to the unrecognized tax benefits noted above, at December 31, 2019 and 2018, we had accrued potential interest and penalties of approximately $0.7 million and $0.5 million, respectively. We have recorded a net income tax expense of $0.2 million during 2019, net income tax expense of $0.1 million during 2018 and $0.9 million net income tax benefit during 2017.

We are subject to taxation in the U.S. and various state and foreign jurisdictions. Our tax years from 2015 through 2019 are subject to examination by the tax authorities. With few exceptions, we are no longer subject to U.S. federal, state, local and foreign examinations by tax authorities for the years before 2015.